Bets mount against the pound
The Telegraph today reports that bets are mounting against the pound as the supply chain crisis intensifies. Trades aimed at insuring against a sterling plunge against the dollar have jumped sharply in the last two weeks, with bearish bets hitting their highest level since March.
Investors are betting more heavily on a slump in the pound than at any time since the lockdown last winter, as stagflation fears stalk the currency.
Sterling has come under significant pressure in recent weeks, despite a growing expectation that the Bank of England will raise rates three times in the next year to bring inflation under control. As a result, it has lost ground against the US Dollar.
Fears of stagflation in the UK
Fears of stagflation, with prices and wages rising but economic growth remaining sluggish have been worsened by petrol shortages, and currency traders are growing nervous of a Bank of England misstep. The move in the one, three and six-month risk reversals – a hedge against a sudden slump in the currency – signals that investors expect a drop in the pound in the coming months against the dollar. However, bearish bets on the pound are still well below the levels hit last December highs as the country was forced to reimpose draconian measures to control Covid.
Kit Juckes, chief currency strategist at Societe Generale, said: “We’ve lost the opportunity for a stronger pound because of all these supply chain issues, because when we add it all up it will have had an impact on the economy for sure. “We were the easiest sell in the market [in the last few weeks] because that was exactly the point where we had all these concerns about supply chains.
Pound holds its own against the Euro
“If the euro makes a further break to the downside, the pound will probably fall at least as fast. That’s mostly a stronger dollar story, it’s just that sterling is an easier story to sell to some people.”
In the opposite direction the GBP/EUR exchange rate surged last week to head for 2021 highs approaching 1.1800. The energy crisis in the UK soothed, but traders also started to factor in European problems after Dutch gas futures prices also hit record highs. The driver of a 0.25% rise on Thursday in the pound Sterling was the minutes of the latest ECB meeting, which showed the bank have discussed an extension to bond-buying once the pandemic program ends.